Tata Power: Leading supplier struggling for RoE accretive growth

Tata Power

Initiating Coverage | Sector: Utilities

Tata Power

Sell

BSE Sensex

29,918

S&P CNX

9,304

CMP: INR84

TP: INR69 (-18%)

Leading supplier struggling for RoE accretive growth

Initiating with Sell

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

TPWR IN

2,705

91 / 67

-7/0/5

227.2

3.4

403

67.0



Financial Snapshot (INR b)

Y/E Mar

2017E 2018E 2019E

Sales

315.1 341.6 358.7

EBITDA

57.5 67.1 69.5

15.6 18.2 18.9

EPS (INR)

5.8

6.7

7.0

EPS Gr. (%)

35.1 16.9

3.9

BV/Sh. (INR )

58.0 63.1 68.6

RoE (%)

10.8 11.1 10.6

RoCE (%)

5.9

6.1

P/E (x)

14.6 12.5 12.0

P/BV (x)

1.4

1.3

1.2

Shareholding pattern (%)

As On

Mar-17 Dec-16 Mar-16

Promoter

DII

23.5

24.5

FII

27.3

26.5

26.2

Others

16.2

16.5

16.3

FII Includes depository receipts



Tata Power (TPWR) is a leading private sector power supplier, with capacity of

10,477MW (71% thermal, ~7% hydro, ~10% wind, 9% solar and 3% waste heat

recovery), largely in India. It is also engaged in electricity distribution in

Mumbai/Delhi, and has stakes in coal mining assets in Indonesia and certain

overseas power generation assets. It has consolidated its position in renewable

energy (RE) – a key driver of growth – with the acquisition of Welspun’s assets.

The company’s earnings would get a boost on sharp increase in thermal coal

prices and inorganic growth. However, RoE will still hover at ~11% over next three

years, which is lower than its cost of equity.

Regulated business, which earns superior RoE, has many challenges and lacks

material growth. The strategic engineering division has tailwinds in the form of

high growth from defense opportunity, but it contributes just 1-2% of EBITDA.

The recent Supreme Court (SC) order has dashed the hope of compensatory tariff

(CT) for CGPL Mundra, leading to losses. The declining structure of capacity charge

and rising O&M costs would remain drags.

Coal prices are strong on supply-side discipline, which is a silver lining because of

its net long position in mining assets in Indonesia.

RE is expected to drive capex and growth. However, it is unlikely to boost RoE due

to high competition.

Coal prices and interest rates are the key sources of earnings volatility, which

drives up cost of equity.

At CMP, the stock trades at ~1.3x FY19E P/BV. Valuations are rich because TPWR’s

RoE is less than its cost of equity and growth is not RoE-accretive. We value the

stock at 1x FY19E P/BV, with a target price of INR69/share. Initiating with Sell.

Regulated business: Many challenges stalling growth

TPWR’s electricity distribution business in Mumbai and Delhi (51% holding),

which represented ~70% of its regulated equity in FY16, is coming under

pressure due to:



Declining capitalization (from ~INR7b p.a. to ~INR4b) on network roll-out

issues in Mumbai



Stricter operating norms impacting ~200-300bp on RoE



Disallowance of capex in Delhi pending physical verification



Declining regulatory asset base in Delhi (releases working capital but

reduces earnings)

Moreover, PPAs for generation capacity in Mumbai (Trombay), which represent

~50% of Mumbai business regulated equity, are expiring in 2018 and may not be

extended due to high cost of generation. Maithon power will see boost to

earnings on securing PPA for its last 150MW capacity. We expect PAT of

regulated business to growth at a modest ~5% CAGR over FY16-19E.

Tata Power

Struggling for growth

91 22 3027 8033

Dhruv.Muchhal@motilaloswal.com

Please click here for Video Link

28 April 2017

Tata Power

Stock Performance (1-year)

Mundra: Aggressive bid and coal prices driving losses; SC denies CT



Aggressive bidding for the CGPL Mundra 4,000MW UMPP and the change in

Indonesian law for supply of coal are driving fuel cost under-recoveries of

~INR14-15b in FY18/19E (INR0.51/0.53 kWh), assuming USD60/t free on board

(FOB) price for 5,400kcal/kg Indonesia coal.

The Supreme Court has denied compensatory tariff for the under-recoveries,

citing that the UMPP tender did not restrict sourcing of coal from any particular

country. Hence, the change in Indonesian law does not invoke force majeure.

We estimate Mundra EBITDA at ~INR6b in FY18/19E, which will decline

gradually as O&M cost increases on aging & inflation and capacity charge

declines as per the structure of the PPA. CGPL Mundra accounts for ~25% of the

group’s total capital employed.

Strong coal prices – only silver lining

TWGR has 30% stake in coal mining assets in Indonesia with its share of 18mt in coal

production assuming the sale of Arutmin. After adjusting for its requirement for

CGPL sale of Arutmin, it will have net long position of 8mt. Hence, coal prices are the

key driver of consolidated earnings.



Declining thermal coal price over last few years was one of the key reasons for

weak earnings at TPWR. As coal business EBITDA declined from ~INR19b in FY11

to ~INR13 in FY16, TPWR’s consolidated PAT fell from ~INR20b to ~INR11b over

the same period.



International coal prices have recovered due to the closure of high-cost mines

across the world and production management by China. We estimate Indonesia

5,400kCal coal to average ~USD60/t in FY18/19E, up from ~USD46/t in FY16.

Resultantly, EBITDA of coal mines would almost double to ~INR25b by FY19E.



We will factor in the sale of Arutim in our model only after the transaction is

executed due to repeated delays in past.

RE is the only growth driver; will it drive RoE accretion?

The company has consolidated its position in RE with the acquisition of Welspun’s

assets. RE is the key driver of growth for TPWR. With the acquisition of Welspun’s RE

assets, TPWR’s scale at ~2.3GW capacity, one of the largest in India, gives it a

competitive edge in sourcing credit, in our view.



We estimate 400MW of annual RE capacity addition and PAT to increase from

INR0.2b in FY16 (~2% of consol. PAT) to INR3.5b by FY20E (~18% of consol. PAT).



Rapidly declining cost of solar panel and the lack of alternative investment

opportunities have attracted hordes of investors and heated up competition.

Equity IRR is generally lower at ~12% v/s distribution business’ ~15%. This barely

covers cost of equity. Therefore, we are not sure if the reinvestment will drive

RoE accretion.

RoE improving, but hardly covers cost of equity



TPWR’s consolidated adjusted PAT is expected to increase by ~64% from

~INR11b in FY16 to ~INR19b in FY19E, led by a sharp increase in thermal coal

prices and Welspun acquisition. Despite the jump in earnings, RoEs would

remain modest at ~10.5-11% over FY17-20E. Superior RoE business of

28 April 2017

Tata Power



distribution is facing challenges. Growth in RE business is unlikely to be RoE

accretive.

Net debt to equity ratio is expected to decline from ~2.7x to 2.1x over FY17-20E.

The dilution in TPWR’s RoE (on declining leverage) will be compensated by new

investment in the superior-RoE distribution business, keeping RoE stable at

~11%.

Coal business would represent ~23-25% of TWPR’s consolidated EBITDA (under

old accounting standards) over FY17-20E. Such heavy reliance on volatile coal

prices has its risk on the deleveraging trajectory, increasing cost of equity.

Value at 1x FY19E P/BV on low RoE and growth; Initiating with Sell



At current CMP, TPWR is trading at FY19E rich P/BV of 1.2x in view of its RoE

hovering at ~11% for next 2-3 years, as against cost of equity of ~12%. There are

limited growth opportunities that can boost RoE. Therefore, we believe the

stock is expensive. NTPC also trades at similar valuations, but its RoE is expected

to increase, led by a strong pipeline of high-RoE projects.

FCF (pre-interest) to enterprise value yield (cash return to the business) is at just

~6%, as against ~10% for peers.

We value the stock at 1x FY19E P/BV, implying a target price of INR69/share.

With 18% downside, we initiate with

Sell.

The pending sale of (i) stake in the Arutmin coal mine (INR27b), (ii) quoted

investments (~INR12b) and (iii) 1.65% stake in Tata Sons would be key toward

value unlocking.

Key risks:

Higher-than-estimated coal prices, resolution of capital under-

recovery issue in Delhi, and the sale of non-core assets.

28 April 2017

Tata Power

Company Overview

Tata Power (TPWR) is leading private sector power supplier with 10,477MW

capacity (71% thermal, ~7% hydro, ~10% wind, 9% solar and 3% waste heat

recovery) largely in India. It is also engaged in the electricity distribution in

Mumbai/Delhi, and has stakes in coal mining assets in Indonesia and certain

overseas power generation assets. It has consolidated its position in RE (renewable

energy) with acquisition of Welspun’s assets. RE is the key driver of growth for

TPWR.

Exhibit 1: A diversified play on Indian power sector

Source: Company

Exhibit 2: Attri. Revenue by businesses (FY18E) - %

Distribution

Generation

Coal

25%

Trans.

IEL

Others

-9%

Mumbai

(S/A)

21%

Delhi

16%

Exhibit 3: Capital employed by business (FY18E) - %

Distribution

Generation

Coal &

Others

20%

Trading

19%

Trans.

Mundra

24%

Source: MOSL, Company

Mumbai

(S/A)

21%

Delhi

Maithon

Mundra

16%

Source: MOSL, Company

IEL Maithon

28 April 2017

Tata Power

Standalone (Mumbai

distribution) and coal

business were the key

contributors to PAT in FY18.

Exhibit 4: Adj. attributable PAT by businesses (FY18) – INR b

15.9

0.8

(3.1)

18.2

5.6

2.6

1.7

0.6

2.1

0.2

*Standalone ex-related party other income

Source: MOSL, Company

Exhibit 5: 10,477MW capacity spread over India and Africa

Source: Company

Exhibit 6: Generation assets by fuel

Solar

Wind

10%

Hydro

Thermal

71%

Source: MOSL, Company

WHR/FG

Exhibit 7: Generation assets by nature of revenue

Merchant

Competitiv

ely bid

42%

Regulated/

Feed-in

56%

Source: MOSL, Company

28 April 2017

Tata Power

Distribution business growth is slowing…

…due to regulatory uncertainty and stricter norms



Regulated equity of Mumbai and Delhi electricity distribution business (including

integrated generation) accounts for ~70% of TPWR’s regulated businesses in FY16

Mumbai business is coming under pressure as (a) capitalization, which drives

regulated equity, declines on network roll-out issues and (b) stricter operating norms.

Mumbai generation’s (Trombay) extension of 1.4GW PPA (of 1.8GW capacity) beyond

FY18 could be at risk due to non-competitive cost. Generation assets represent ~50%

of Mumbai business regulated equity.

Delhi business is (a) already suffering from disallowance of capex pending physical

verification of assets and (b) declining regulatory asset base as per the tariff policy.

We expect only a modest growth in distribution businesses.

Strategic engineering division has tailwind of high growth from defense opportunity

but it contributes just 1-2% of EBITDA.

TPWR has electricity distribution licenses for parts of Mumbai and Delhi. The

company competes with Reliance Infrastructure in the Mumbai distribution circle.

Its Mumbai business, part of the standalone entity, also includes the integrated

generation and transmission assets. The Delhi distribution business is operated

through a 51% joint venture (JV), the other partner being the Government of Delhi.

Regulated equity of the two businesses combined represented ~70% of the

company’s regulated businesses in FY16. Regulated business provides an assured

15.5%-16% return on equity, along with incentives for efficient operation (linked to

AT&C losses, generation efficiency, working capital efficiency and others).

Mumbai: Growth to slow down, led by moderating capex and

stricter norms; risk of generation PPAs expiring

Capex growth moderating on supply issues with competitors

TPWR competes with Reliance Infrastructure in Mumbai distribution. Due to issues

pertaining to change-over of customers from competitor network, non-fulfillment of

universal service obligation, duplication of network addition and resultant additional

cost burden on consumers, etc., the company’s network roll-out plan in Mumbai is

in jeopardy. We believe TPWR’s network roll-out plan (a committee has been set-up

to take a decision on network roll-out) is likely to be constrained as one of the

conditions set by the regulator is to avoid duplication where competitor’s network

exist (Reliance Infra has a well-established network in Mumbai). Regulated equity

growth through network addition is the key earnings driver for a distribution

business.

Capex approved by the regulator for the company’s Mumbai circle has declined

from a run-rate of ~INR7-8b p.a. in FY13-15 to ~INR3-5b p.a. over FY17-20. Lower

capex will lead to slower earnings growth in the Mumbai distribution business.

28 April 2017

Tata Power

Approved capex run-rate

declined from ~INR7-8b p.a.

in FY13-15 to ~INR3-5b over

FY16-20, which should

moderate earnings growth

Exhibit 8: Mumbai regulated business approved capex (Gen/Distri/Trans)

Mumbai regulated capex - INR m

6,154

FY13

12,470

FY14

8,676

FY15

5,656

FY16

4,256

FY17E

5,538

FY18E

4,273

growth over gross fixed assets - %

2,962

FY19E

FY20E

Source: MOSL, Company

Approved capex is

significantly lower than

proposed by the company

due to issues pertaining to

network roll-out

Exhibit 9: Mumbai distribution and transmission – approved and claimed capex

Capex approved - INR b

4.8

3.8

2.7

5.4

3.7

2.7

Capex claimed - INR b

6.4

7.4

FY17E

FY18E

FY19E

FY20E

Source: MOSL, Company

Stricter regulations to drag earnings in near term

The Maharashtra regulatory commission revised operating norms for the regulated

electricity businesses in its recent review for the period FY17-19. Norms pertaining

primarily to station heat rate (SHR) for generating plants, O&M allowance and

interest rate allowance were made stricter.

The change in interest rate allowance from SBI advance rate (~14%) to SBI base rate

(~9%) + 150bp on working capital and regulatory asset will impact the company’s

Mumbai business annual PBT by ~INR1.3b (or ~200-300bp on Mumbai business

regulated equity). We expect additional impact from changes in SHR/O&M norms.

Change in interest rate

allowance from ~14% to

~10.8% on working capital

and regulatory assets will

impact earnings by

~INR1.3b

Exhibit 10: Change in allowance of interest rate recovery will impact earnings

Recovery of interest on WC and regulatory asset - INR m

4,441

Recovery at SBI

Advanced Rate

(~14%)

FY16E

Decrease of INR 1.3b

~4% of the requlated

equity of INR36b

3,111

Recovery at SBI Base

Rate

(~10.8%)

FY17E

Source: MOSL, Company

28 April 2017

Tata Power

Exhibit 11: Operating norms for tariff period FY17-19 are made stricter

Old regulations FY13-16

Sharing of gains and losses

1/3rd of efficiency savings shared with customers

Sharing of saving in interest cost (through renegotiation)

No sharing

Working capital days

Receivables - 60 days

Secondary fuel oil consumption

Coal plants - 1ml/kWh

O&M allowance

No allowance was efficiency

Incentive for transmission business

HDVC line - 92-95% availability

AC systems - 98%

Interest rate on working capital and regulatory assets

State Bank Advance Rate (~14%)

Revised regulations FY17-19

2/3rd of efficiency savings shared with customers

1/3rd of saving to be shared

Receivables - 45 days

Coal plants - 0.5ml/kWh

O&M reduced by 1% p.a. for efficiency

HDVC line - 96% availability

AC systems - 99%

SBI Base Rate (~9.3%) + 150bps

Source: MOSL, Company

Risk of not getting extension to generation PPAs beyond 2018

TPWR’s Mumbai regulated generation assets have capacity of 1,877MW, which

comprises of 1,400MW (unit 5, 6, 7 and 8 - a mix of oil/gas/coal) and 447MW of

hydro assets. It has signed PPAs with Tata Power Mumbai Distribution and BEST,

which will expire in March 2018. We see a risk that PPAs for some of these units will

be not be extended. Except for the hydro assets, the other units have a variable

generation cost of more than INR3/kW. In its tariff filings, the company has not

sought extension of the PPA for Unit 6 (500MW) as it is in stand-by mode and rarely

used. The commission has asked TPWR to justify why the other units continue to be

the cheapest source of power, and why competitive bids should not be evaluated

when current PPAs expire. What benefits TPWR is that there are transmission

constraints in sourcing power from outside Mumbai, which could force extension of

the PPAs despite them not being competitive. However, we believe transmission

capacity can be enhanced in a couple of years through investment rather than

justifying extending the terms of uncompetitive PPAs.

The regulated equity of generation assets was ~INR19b, which represents ~50% of

the Mumbai business’ total regulated equity of ~INR38b in FY16. If PPAs are not

renewed, we see a significant risk to earnings of the standalone business. Our

estimates do not factor in this risk.

Generation business’

regulated equity represents

~50% of Mumbai’s

regulated equity; significant

risk to earnings if PPAs

expiring in March 2018 are

not extended

Exhibit 12: Mumbai generation business regulated equity as share of total

FY16 - INR b

~50% of regulated equity

of Mumbai business is in

generation

Generation reg. equity

Mumbai reg. equity

Source: MOSL, Company

28 April 2017

Tata Power

Defense: ‘Make in India’ still has time to shape up

The company’s standalone operations also include the defense business (called

Strategic Engineering Division, or SED). Tata SED is one of the few private sector

contractors for the Ministry of Defense (MoD). With most of India’s defense needs

imported until now, the government’s ‘Make in India’ campaign presents significant

growth opportunities for players like Tata SED. The MoD has selected Tata SED-led

consortium as one of the developers of the INR500b Battlefield Management

System (BMS) project. Tata SED’s revenues have grown at a CAGR of ~18% to INR5b

over FY12-16. We estimate revenue CAGR of ~15% to INR10b over FY16-20E. While

we understand that the opportunity size is huge, MoD orders have been slow to

come, primarily due to fund constraints and bureaucratic decision-making. The

‘Make in India’ concept in the private sector (defense) is still maturing and would

take some time to gather steam, in our view. Moreover, defense orders have long

gestation periods, and it will take time before any potential future order contributes

meaningfully to TPWR’s consolidated profit.

Exhibit 13: Revenue – standalone non-power (INR b)

Electronics division (defence)

Others

325

401

581

855

637 1,083 1,243 1,430 1,644 1,891

11.0

Exhibit 14: EBITDA – standalone non-power (INR b)

17.5

EBITDA - INR m

18.6

14.2

9.6

EBITDA margin - %

15.0 15.0 15.0 15.0 15.0

Source: MOSL, Company

Standalone: Stricter norms to impact earnings growth

We expect standalone business EBITDA to be impacted by slower capex growth in

the regulated business and lower incentives (as operating norms become stricter).

The impact could be partially mitigated by strong growth in defense and O&M

services, but would not be enough to offset the impact on its core operations. We

estimate standalone EBITDA to decline from INR26.6b (includes certain one-offs) in

FY16 to INR23.3b in FY17, and gradually grow to INR25.2b by FY20E.

Standalone core earnings

will be impacted on stricter

norms and slow growth in

regulated business

Exhibit 15: Standalone EBITDA – INR b

Standalone EBITDA - INR b

26.6

22.9

20.2

17.8

23.3

21.1

24.1

24.7

25.2

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

Source: MOSL, Company

28 April 2017

Tata Power

Delhi: Low RoEs on capital under-recovery

Delhi’s net asset model is structurally low-growth, but less capital intensive

The Delhi regulated distribution business is based on net asset model (as against

typical gross asset model followed by the CERC and most other state regulators for

regulated businesses). Under gross model, the regulated equity on which companies

earn RoE is ~30% of gross assets (30% of annual capex is addition to regulated equity

for the year). However, under net model, regulated equity is ~30% of net assets (i.e.

30% of depreciation for the year is also deducted from regulated equity). The net

asset model allows for re-use of capital, in effect lowering the incremental capital

and thus the absolute incremental earnings as compared to the gross asset model.

The RoE profile, however, in both the business models are similar.

Physical verification of assets leading to capital under-recovery

The Delhi regulator has disallowed a significant portion of TPWR’s investment in the

Delhi distribution circle. While gross block claimed by the company was ~INR56b in

FY16, the regulator has approved only ~INR42b. Similarly, while TPWR claims

regulatory assets of ~INR47b, the regulator has allowed only ~INR29b. Thus, while

the company’s total investment claim is ~INR103b, the regulator has approved only

~INR71b. The gap is primarily due to pending physical verification of assets and

disallowances of certain expenses. As earnings are based on approved

capex/expenses, the gap is causing under-recovery at Delhi and thus impacting

earnings and RoEs.

~30% of the company’s

investment is stuck due to

regulatory disallowance

Exhibit 16: TPWR Delhi: Claimed and approved gross block and regulatory assets

Gross fixed assets FY16 - INR b

103

Regulatory assets FY16 - INR b

Approved

Source: MOSL, Company

Claimed

Earnings growth to moderate as regulatory assets are recovered

TPWR Delhi earns RoE even on the equity component (@ 30%) of regulatory assets

(unlike Mumbai where it earns only debt returns). According to the National Tariff

Policy (NTP) 2016, regulatory assets are to be eliminated over next few years. The

increase in regulatory assets over last few years in TPWR Delhi drove regulated

equity base higher, driving earnings. However, with drawdown in the regulatory

asset base as per the NTP, regulated equity is expected to decline, leading to lower

earnings.

28 April 2017

Tata Power

Declining regulatory assets

in Delhi will impact earnings

Exhibit 17: TPWR Delhi regulatory asset gap (as approved)

Regulatory asset (as approved) - INR b

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: MOSL, Company

Inferior RoEs and muted PAT due to under-recovery and lower regulatory

assets

TPWR Delhi’s RoEs declined from ~15-19% in FY11-13 to ~10% in FY16 due to under-

recovery on investments. Attributable PAT (ex-minority for TP) ranged from

~INR1.3-1.7b over this period. We expect the trend to continue, with RoEs of ~11-

12% over FY17-20E and PAT at ~INR1.7b, unless there is a favorable outcome of

physical verification of assets. TPWR Delhi follows low-growth net asset model (as

discussed earlier), with earnings growth is further constrained by a decline in

regulatory assets (and resultantly regulated equity).

TPWR Delhi’s RoE and

earnings likely to remain

muted due to under-

recovery on investments

and muted regulated equity

growth

Exhibit 18: TPWR Delhi’s attributable PAT (ex-minority shareholding) and RoE

Attributable adj. PAT - INR b

19.6

16.6

15.2

14.7

13.7

10.0

12.3

11.9

11.6

11.2

RoE - %

1.3

FY11

1.7

FY12

1.6

FY13

1.7

FY14

1.7

FY15

1.3

FY16

1.7

FY17E

1.7

FY18E

1.7

FY19E

1.7

FY20E

Source: MOSL, Company

Regulated business: Growth slowing

Besides the distribution business, the other regulated business of TWPR are the

Maithon Power Plant (1,050MW, 74% stake), Powerlinks Transmission (51% stake)

and IEL (captive power plants, 74% stake).



We estimate attributable PAT of Maithon Power plant to increase from INR1.4b

in FY16 to INR2.3b by FY19E on full benefit of the remaining 150MW PPA signed

in FY16 and capitalization of pending capex.

IEL attributable PAT is estimated to increase from INR0.5b in FY16 to INR0.8b by

FY19E on commissioning of capacity at Kalinganagar.

Powerlinks Transmission attributable PAT would remain steady at INR0.5b

28 April 2017

Tata Power

We estimate TWPR’s regulated business would represent ~64% of the consolidated

PAT in FY18E. We estimate only a modest ~5% cagr growth in PAT of regulated

business over FY16-19E on slowing growth in the electricity distribution business.

Exhibit 19: Regulated business share of PAT – FY18E

Exhibit 20: PAT by nature of business – INR b

Regulated

PAT by business - INR b

Others

36%

Regulated

64%

15.6

11.5

10.0

10.2

11.7

11.9

18.2

Others

18.9

20.0

Source: MOSL, Company

28 April 2017

Tata Power

Mundra – Court denies tariff relief

Fuel cost under recoveries and declining fixed charge are key drags



Mundra UMPP was an aggressively bid out project by TPWR which is driving losses.

The fixed portion of the tariff is not enough to recovery of a reasonable IRR, implying

profitability of the project was hedged on coal prices.



The implication of an aggressive bid was exacerbated by the change in Indonesian law

for supply for coal. TPWR had entered into fixed price supply contract with Indonesian

mines, which become void due to change in law.



The Supreme Court has denied any tariff relief to Mundra.

We expect fuel cost under-recovery of ~INR14-15b in FY18/19E @ USD60/t Indonesian

5,400kCal coal prices.

EBITDA is estimated at ~INR6b in FY18/19E declining gradually and turning negative in

the final years of the PPA term due to rising under-recoveries as coal prices increase,

increase in O&M and decline in fixed capacity charge.



At 8.5% cost of debt we estimate the NPV of Mundra UMPP is negative INR5b.

The Mundra power plant is a 4,000MW UMPP won by TPWR under case-2 reverse

bidding in 2008. The project was gradually commissioned from FY12. It relies on

imported coal for fuel. Under case-2 bidding, companies bid for escalable and non-

escalable capacity, fuel, transport and other charges for each year of the project life.

The escalation rate is calculated by the CERC every six months.

While change in coal supply

rules by Indonesia did

impact Mundra’s

performance, the bigger

cause was the initial

aggressive bid

The Mundra UMPP has been a drag on the company’s operations, generating only

INR28b in EBITDA since its commissioning in FY12 on gross investment of ~INR190b.

The under-performance at Mundra is due to the initial aggressive bid to secure the

PPA. This was further exacerbated with the change in Indonesian law for coal supply

in 2012 (TPWR has secured coal mines in Indonesia to run the Mundra power plant).

The Indonesian law for coal supply was changed in 2012 which made all sale

contracts compulsorily linked to a benchmark market determined coal price, thus

nullifying all fixed-price coal supply agreements entered by companies.

Aggressive bid – primary cause of drag at Mundra



TPWR bid ~INR0.9/kWh as capacity charge, which declines to ~INR0.6/kWh over

last six years of the bid. The capacity charge in a bid should be so designed that

it is able to recovers the capital and other fixed costs of running the plant

irrespective of the plant getting schedule to run. However, in case of TPWR

Mundra assuming maximum potential generation, the quoted fixed charge and

INR2b on annual maintenance capex, the project IRR is just ~7%. The bid was

extremely aggressive from the beginning.

28 April 2017

Tata Power

Exhibit 21: Mundra UMPP fixed recovery – INR/kWh

Fixed charge less O&M - INR/kWh

Exhibit 22: Mundra UMPP fixed recovery and IRR

Fixed charge recovery (net of O&M and INR2b in annual capex) -

INR b

IRR of ~7%

gross block of

INR190b in

FY14

Source: MOSL, Company



Source: MOSL, Company



TPWR was aggressive even in bidding for fuel cost. When bidding in 2008, it kept

~55% of fuel cost fixed and remaining ~45% was linked to movement in

international coal prices. However, it hedged back-to-back at fixed cost only

~35% of its coal requirement. This basic flaw in its bid exposed it to significant

increase in coal prices. Thus, even if Indonesian law had not changed, we believe

in an inflationary coal price situation, TPWR would have gained revenue benefit

only on 45% of its generation, but cost would have increased on 65% of

generation, driving under-recovery at Mundra.

With change in Indonesian law in 2012 to supply of coal at market-determined

prices, TPWR’s fixed coal purchase contract became void, exposing it to volatility

on its full coal cost (as against 65% had the law not changed).

The Supreme Court denies tariff relief for losses at Mundra

After a number of years of litigation seeking relief, the Supreme Court in a judgment

dated April 11

, 2017 denied any tariff relief for the losses at Mundra. The Court

said that



The change in Indonesian law is not a Force Majeure event as it does not impact

TPWR Mundra’s delivery on the contract



It is not a change in law event unless the event pertains to India



And, the PPA conditions do not require the developer to source coal from

Indonesia. The developer is free to source coal from any other country, if the

law in Indonesia has changed. The responsibility of sourcing coal was of the

developer and not the DISCOMs and thus any benefit/impact cannot be

transferred on to the DISCOMs.

EBITDA to decline on increasing coal prices, O&M and lower fixed charge

We estimate Mundra to have a fuel cost under-recovery of ~INR14-15b in FY18/19E

@ USD60/t Indonesia 5,400kCal FoB coal price. EBITDA is estimated at ~INR6b. WE

estimate the EBITDA to decline gradually and turn a significant negative by the end

of the PPA term in FY37 driven by

(a) Increase in fuel cost under-recovery due to ~2% annual expected increase in

coal prices. With inflation, the under-recovery at Mundra increases at a higher

rate due to the structure of escalable and non-escalable fuel charge in tariff.

(b) Increase in O&M expenses by ~3% annual, lower than the expected inflation

expectation for India

28 April 2017

Tata Power

years of the PPA

The NPV of the EBITDA @8.5% cost of debt fund is estimated at negative ~INR5b.

Even including the proportionate share of profit of coal assets (i.e. profit for the

share of coal consumed by Mundra to total coal mining volumes) the NPV is

~INR98b. This compares to the net debt of ~INR151b in FY18E.

Exhibit 23: Mundra EBITDA

Mundra EBITDA - INR b

3 5

6 6 5 5 4 3 3 2 1 1

0 -1 -2 -3 -4

-4

-12 -14

-11

-16

-13

-15

-8

-15

-9

-3

-11

Exhibit 24: Mundra PAT

PAT - INR b

-12

Source: MOSL, Company

Options being evaluated to reduce losses

Post the Supreme Court judgment TPWR is evaluation various alternatives to reduce

the losses at Mundra. It includes:



Sourcing coal from some other countries where it can be sourced cheaply than

Indonesia. We believe the sea-borne market is well inter-linked. The gains, if

any, will be limited.



Using the losses at Mundra to get income tax offset at some of the profit making

operations. This could drive some gains. However, the opportunity size is

limited. Most of the profits making operations of TPWR are regulated nature

where any tax savings is a pass-through in tariff. Renewable energy business is

an option but considering TPWR’s long-term goal to divest this business in a

separate entity, clubbing the volatility of Mundra would not be a favorable

choice.

28 April 2017

Tata Power

Coal – tide has turned

Coal business profit to double led by higher coal prices



The decline in coal prices over past few years has been a major drag on the company’s

performance. EBITDA from coal assets declined from INR23b in FY12 to INR13b in FY16

on account of lower coal prices.



Coal prices have recovered from lows of ~USD50/t due to China’s policy actions. China,

which consumes more than 50% of global coal, has constrained local production to

improve supply/profitability of local mines.



We estimate thermal coal prices for 6,000kCal coal to stabilize around USD70/t

(Indonesian coal trades at a discount), in line with the policy limits set by China.

TPWR’s EBITDA from coal assets is expected to double from INR13b in FY16 to INR25b

in FY17/18, led by higher prices and production. The coal business is a key driver of

improvement in the company’s consolidated earnings.



TPWR has invested in thermal coal mines with cumulative annual production of ~80-

90mt. It operates as a JV partner (with a 26-30% stake) in all its coal assets. The

objective of investing in coal mines was to hedge its imported coal requirement at

Mundra UMPP, Tata Trombay Power Plant and other planned imported coal-based

plants. However, the plans for other imported coal-based plants (other than

Mundra) have since been shelved, resulting in the company turning net long in

thermal coal. TPWR effectively produces ~24-27mt of coal annually (@30% stake),

as against its requirement of ~10mt at Mundra, resulting in ~14-17mt net long

position in coal.

Exhibit 25: TPWR overseas coal assets

Coal assets

Kaltim

Arutmin

BSSR

Stake

Production

est. - mt

50 - 60

20 - 30

7-8

Source: MOSL, Company

TPWR invested ~USD1.1b in 2007 toward acquiring coal assets. The investment has

been profitable, having generated ~USD2.6b in effective EBITDA over FY08-16. At

the peak of post-crisis coal price in FY12, EBITDA from coal represented ~45% of the

company’s consolidated EBITDA.

Exhibit 26: Coal EBITDA and benchmark prices

Coal EBITDA - INR m

Indocoal 5,400kCal - USD/t

Exhibit 27: Coal’s share of consolidated EBITDA – %

Coal's share of consol. EBITDA - %

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: MOSL, Company

28 April 2017

Tata Power

The contribution from coal assets, however, has declined sharply since its peak in

FY12 due to a fall in global coal prices. Coal EBITDA dropped from INR23b in FY12 to

INR13b in FY16, while as a share of consolidated EBITDA, it has declined from 46% to

just 14%. The decline in profitability of coal assets has been one of the key drivers of

the company’s under-performance over past few years.

Recovery in coal prices on China’s policy action

Global thermal coal prices have recovered from their lows of ~USD50/t in 1Q-

2QCY16 to more than USD80/t (Richards Bay FoB, 6,000kCal). While overall

sentiment for coal remains negative amid rising affordability of renewables, two

factors have driven the recent sharp increase in coal prices: (i) increase in coal

demand in China and (ii) production restrictions in China. We note that as China

consumes ~50% of global coal, its actions have significant influence on prices. We

estimate thermal coal prices for 6,000kCal coal to stabilize around USD70/t

(Indonesian coal trades at a discount), in line with policy limits set by China.

China consumes ~50% of

global coal and thus has

significant influence on

global prices

Exhibit 28: Share of global coal consumption by China (in Mtoe terms) - %

Others, 50

China, 50

Source: MOSL, BP

Exhibit 29: Coal imports in China are rising

Coal imports (mt)

YoY (%)

16%

52%

67%

64%

Exhibit 30: On demand and production cuts

-1

-3

Coal Production (YoY %)

-5

-11

-16 -17

-13

-11

-12 -12

-5

-3

Source: MOSL, Company

Operating efficiency has improved led by cost cuts

Amid falling global coal prices, TPWR’s coal mines have significantly trimmed

production cost, partially offsetting the impact of lower prices. Reported cost of

goods sold (COGS) has declined from USD39/t in FY14 to USD27/t in FY17. While

COGS is likely to increase as thermal coal prices and certain input costs (like diesel)

rise, we expect the company coal mines to largely maintain their margins.

28 April 2017

Tata Power

Operating efficiencies,

exchange rate and lower

input prices drove COGS

lower. We expect cost

efficiencies to be largely

retained even at higher coal

prices

Exhibit 31: TPWR’s coal mines’ COGS, and Indonesia 5,400kCal benchmark coal prices

Indonesia 5,400kCal benchmark - USD/t

COGS - USD/t

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

Source: MOSL, Company

Higher coal prices to boost profitability

We estimate profitability of TPWR’s coal business to almost double from INR13b in

FY16 to INR25b in FY17, led by higher coal prices and higher production. Coal

business is the key driver of improvement in the company’s consolidated

performance.

Exhibit 32: Coal business EBITDA – INR b

Coal business EBITDA - INR b

Indonesia 5,400kCal benchmark - USD/t

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

Source: MOSL, Company

Sale of Arutmin and related assets not factored in

TPWR entered into an agreement with Indonesia’s Bakrie Group in November 2016

for sale of its 30% stake in PT Arutmin coal mining assets along with related

infrastructure. Aggregate consideration is ~USD400m, which is expected to be

received in a phased manner. While specific details are not available, we believe the

transaction should be value-accretive as Arutmin mines have high operating cost (in

FY16, Arutmin reported PAT loss of INR1.3b). We, however, have not factored in the

deal in our estimates due to the history of the transaction. The sale of Arutmin was

first agreed in January 2014, but due to certain legal issues and unhealthy financial

condition of the buyer, the transaction was delayed. We will factor in the deal in our

estimates once the first tranche of purchase consideration is received by the

company.

28 April 2017

Tata Power

Overseas generation – will now start delivering

Assets commissioning in FY17-18

TPWR has also invested in generation assets outside India. It has invested in three

projects (total of ~USD1b), where it is a partner with 40-50% stake.

Exhibit 33: TPWR overseas generation assets

Plant

Georgia

South Africa

Zambia

Hydro

Wind

Hydro

Capacity

185

229

120

TP stake

Project cost

USD m

404

500

200

Comm.

FY18

FY17

Profile

Merchant basis

20 years PPA

25 years PPA

Source: MOSL, Company

The plants will be commissioned in FY17-FY18. We estimate EBITDA from overseas

generation assets to increase from ‘nil’ in FY16 to INR4.6b by FY19. Capital

employed in overseas generation represents ~4-5% of the company’s consolidated

capital employed. We estimate overseas assets to generate RoE of ~14%.

Exhibit 34: EBITDA from overseas generation

EBITDA overseas generation - INR b

4.5

3.7

4.2

4.6

4.5

Exhibit 35: Capital employed in overseas generation

Overseas generation capital employed - INR b

% of consolidated CE

5.0

4.8

4.6

0.0

FY16

FY17E

FY18E

FY19E

FY20E

23.1

FY16

32.7

FY17E

33.3

FY18E

32.0

FY19E

30.6

FY20E

Source: MOSL, Company

28 April 2017

Tata Power

RE – driving growth

Interest cost arbitrage driving value in Welspun acquisition



The acquisition of Welspun assets was completed in 3QFY17. With that, TPWR was

able to create one of the largest RE businesses in India.

Better leveraging and TPWR’s credit profile are driving value in Welspun acquisition.

We estimate the Welspun acquisition to generate equity IRR of ~15%.

With one of the largest scale and strong credit profile, TPWR’s RE business has

competitive edge in sourcing debt.

The company’s RE PAT is expected to grow from INR0.2b in FY16 to INR3.5b by FY20,

led by the acquisition of Welspun, capacity addition and lower interest cost.

Share of RE in TPWR’s consolidated PAT is estimated to increase from ~2% in FY16 to

more than ~18% by FY20.

However, project IRRs would be relatively low at ~12% due to aggressive competition.



Welspun: Driving value through interest cost arbitrage

TPWR acquired Welspun’s renewable asset portfolio of 1,140MW in early FY17. The

transaction was completed by 3QFY17 at an enterprise value of ~INR 92b. The assets

include a wind plant of 146MW and solar power plants of 1,286MW. While specific

capital cost (on transaction value) is significantly higher at INR81m/MW relative to

replacement cost, the tariff on these plants is equivalently higher at +INR8/kWh

(compared to recent solar tariffs of INR3-4/kWh).

We estimate Welspun acquisition to generate equity IRR of ~15%. The company is

likely to generate value through better leveraging and a healthier credit profile. At

80:20 debt:equity and 7.5% cost of debt at a tax rate of ~25%, we estimate the

equity IRR on the acquisition is ~15%. Our estimates are based on detailed tariff

study of individual assets, a degradation factor for solar panels of 0.5% per annum,

and PLF on the solar plant in the first year of acquisition of 18%. The company

recently raised bonds and bridge finance at a cost of 7.5-8%. The higher tariff of

these plants does not pose off-take risk as renewable assets have a must-run status.

We estimate Welspun

acquisition to generate

equity IRR of ~15%

Exhibit 36: FCFE on Welspun assets (INR m)

Debt:Equity - 80:20

Interest cost: 7.5%

FCFE - INR m

Equity IRR - 15%

Source: MOSL, Company

28 April 2017

Tata Power

We estimate annual

degradation of solar panel

@0.5%, driving lower

generation over the years

Exhibit 37: Welspun assets – generation profile

Generation - MU

Source: MOSL, Company

Size and credit profile drive competitive advantage; RE driving capex

With the Welspun acquisition, TPWR has created one of the largest RE businesses in

India with capacity of ~1.8GW (excluding 500MW RE assets in standalone business).

Steady cash generation on these assets, along with the backing of TPWR’s strong

credit profile, is likely to provide its RE business a competitive cost advantage in

sourcing debt. With ~80% of capital cost in RE projects typically backed by debt,

competitive debt sourcing is a key differentiator. The company plans to annually add

~400MW of renewable generation capacity. We are building in capital cost of INR50-

55m/MW and tariff of INR5/kWh on incremental capacities. While these could

change with rapidly declining costs, we believe that in the long term TPWR RE’s

competitive cost advantage will allow it to earn IRR of ~12% on incremental

capacities, despite an extremely competitive RE market in India. However, in the

near-to-medium term reasonable IRR growth opportunities would depend on the

competition in the market. Recent solar bids suggest that developers are taking

aggressive bids on decline in solar panel prices, interest rate and probably are

comfortable with lower equity IRRs. This could hinder near-to-medium term

reasonable growth opportunities for TPWR.

We estimate 400MW

addition to RE annually

Exhibit 38: TPWR’s renewable capacity (excluding assets in standalone business)

Capacity - MW

2,234

1,834

1,434

2,634

FY12

FY13

FY14

164

FY15

294

FY16

FY17E

FY18E

FY19E

FY20E

Note: Excludes 500MW RE assets part of standalone operations

Source: MOSL, Company

RE getting larger at TPWR; share of PAT to increase to ~18% by FY20E

We estimate TPWR RE’s PAT to grow from INR0.2b in FY16 to INR3.5b by FY20, led

by the acquisition of Welspun, capacity addition and lower interest cost. RoE of the

business is estimated to improve from ~3% over last few years to ~10-11% by

FY19/20E. A solar project typically has a lower RoE profile in the initial few years, as

28 April 2017

Tata Power

interest cost takes away a larger share of operating cash flow. It increases gradually

over the years as interest cost declines. From an insignificant ~2% of TPWR’s

consolidated PAT, we estimate the share of RE to increase to ~18% by FY20. The

growth in RE would however not be RoE accretive as IRRs on RE projects is low due

to competition.

Contribution of TPWR’s RE

to consolidated PAT to

increase to ~18% by FY20E

Exhibit 39: TPWR’s renewable PAT (INR m)

PAT - INR m

3,540

2,839

2,090

1,219

FY12

FY13

FY14

FY15

193

FY16

FY17E

FY18E

FY19E

FY20E

Note: Excludes 500MW of RE assets part of standalone operations

Source: MOSL, Company

28 April 2017

Tata Power

RoE improving but hardly covers cost of equity

Value at 1x FY19E P/BV on low ROE and growth; Initiating with Sell

TPWR’s adjusted consolidated PAT declined from ~INR21b in FY11 to a loss of

~INR3b in FY14 before recovering partially to ~INR12b in FY16. Capital employed

during this period increased ~60% to INR553b (in FY16). RoE has languished below

~9%. A number of factors drove the under-performance:

(a) The contribution of coal, which at its peak in FY12 represented ~46% of the

consolidated EBITDA, declined to just ~14% in FY16 along with coal prices.

(b) The commissioning of loss-making Mundra UMPP, which incurred peak adj. PAT

loss of INR15b in FY14.

employed.

(d) Rise in interest cost.

Adj. PAT languished due to

lower coal prices, start of

unprofitable Mundra,

under-recovery at Delhi and

increase in interest cost

Exhibit 40: Adj. PAT contribution by major businesses – INR b

S/A (ex-rp income)

20.6

7.1

CGPL

Maithon

7.6

-8

Delhi

Others (primarily coal)

1.7

11.5

-3

-3.3

adj. PAT - INR b

-15

FY14

-4

-9

FY11

FY12

FY13

FY15

FY16

Source: MOSL, Company

The outlook for the business has somewhat improved led by increase in coal prices.

We estimate TPWR’s consolidated adj. PAT to increase by ~64% over FY16-19E to

~INR19b. The increase in PAT is also aided by growth in RE business, partially offset

by higher losses at Mundra. While earnings would improve, we expect the RoE

would remain below the cost of equity at ~10.5-11% over FY17-20E due to

significant under-recovery on Mundra UMPP and lower returns in the Mumbai

distribution business.

Improving profitability of

coal assets and

corresponding lower under-

recovery at Mundra UMPP

are key drivers for doubling

of consolidated PAT by

FY19E

Exhibit 41: Driver of consolidated PAT over FY16-19E (INR b)

Adj. PAT - INR b

11.9

11.5

PAT bridge

2.6

(8.7)

0.9

(0.4)

0.4

0.6

18.9

Source: MOSL, Company

28 April 2017

Tata Power

Exhibit 42: TPWR – consolidated adjusted PAT (INR b)

Adj. consolidated PAT - INR b

Exhibit 43: TPWR – consolidated adjusted RoE (%)

16.5

Adj. RoE - %

10.8 11.1 10.6 10.4

6.0

20.6

7.1

7.6

-3.3

1.7

11.5 15.6 18.2 18.9 20.0

7.0

1.4

-3.1

9.0

Source: MOSL, Company

The leverage (net debt to equity) is high at ~2.7x in FY17E. It is expected to

normalize to ~2.1-2.3x by FY19/20E on increase in earnings.

Exhibit 44: Net debt to equity – x

Net debt to Equity - x

3.1

2.7

2.5

Exhibit 45: FCF (post-interest) – INR b

Adj. FCF (post interest) - INR b

INR20b WC release

2.5

2.3

2.1

-64

-40

Welspun

acq.

-78

2.9

2.4

1.5

-7

-72

-13

Source: MOSL, Company

*Does not incl. one-time CERC relief

Source: MOSL, Company

FCF generation would go into funding of RE expansion, distribution capex,

maintenance capex in coal assets and meeting the under-recoveries at Mundra.

While incremental capex is in higher RoE projects, the scale is small (less than 10%

of capital base) and the normalization of leverage is offsetting the gains. The high

leverage would impact TPWR’s ability to seek attractive growth opportunities in a

sector where most of the players are in financial stress. Coal business would

represent ~23-25% of TWPR’s consolidated EBITDA (under old accounting standards)

over FY17-20E. Such heavy reliance on volatile coal prices has its risk on the

deleveraging trajectory, increasing cost of equity

Increasing investments in RE (both organic and inorganic), slow growth in regulated

businesses and an improvement in non-regulated businesses (primarily coal) are

driving a gradual shift in TPWR’s business from regulated to unregulated. Approved

regulated equity represented ~47% of the company’s consolidated net worth in

FY16, which is expected to decline to ~34% by FY20. In terms of capital employed,

the share of regulated business is estimated to drop from ~53% in FY16 to ~44% by

FY20. The changing risk profile of the business needs to be adequately factored in

when determining TPWR’s cost of equity.

28 April 2017

Tata Power

Exhibit 46: Share of net worth by businesses

Regulated %

RE %

Others %

Exhibit 47: Share of capital employed by businesses

INR m

Distr. & Trans.

Gen. ex-CGPL

553

FY16

Integrated utility

CGPL

Others

700

FY20

Source: MOSL, Company

667

FY18

FY16

FY18

FY20

Source: MOSL, Company

Exhibit 48: Contributors of PAT – INR b

Regulated

-3

FY16

-12

FY17

Coal & Bal.

-11

FY18

Mundra

-12

FY19

-12

FY20

Source: MOSL, Company

Value at 1x FY19E P/BV on low RoE and growth; Initiate with Sell



At current CMP, TPWR is trading at FY19E rich P/BV of 1.2x in view of its RoE

hovering around ~11% for next 2-3 years against cost of equity of ~12%. There

are limited growth opportunities that can boost RoE. Therefore, we believe the

stock is expensive. NTPC also trades at similar valuations but its RoE is expected

to increase on strong pipeline of high RoE projects.

The FCF (pre-interest) to Enterprise value yield (the cash return to the business)

is at just ~6% against ~10% for peers.

We value the stock at 1x FY19E P/BV implying a target price of INR69/sh. With

18% downside, we initiate with Sell.

The pending sale of stake in Arutmin coal mine (INR27b) and unlocking value

from sale of quoted investments (INR12b) and the 1.65% stake in Tata Sons

would be key towards value unlocking.

TPWR’s FCF to EV yield is

lower than its peers.

Exhibit 49: FCF (pre-interest) to EV yield - %

9.2

5.5

CESC

10.1

6.0

Tata Power

11.3

6.4

FY18E

FY19E

FY20E

Source: MOSL, Company

28 April 2017

Tata Power

The stock has traded at

relatively higher P/BV

despite expectation of

lower than CoE returns on

expectation of Mundra

resolution. With clarity of

Mundra and limited

earnings growth, we expect

stock to de-rate.

Exhibit 50: 1yr fwd P/BV, RoE

2.75

2.25

1.75

1.25

0.75

P/BV (x) - lhs

RoE (%) - rhs

CoE (%) - rhs

Source: MOSL, Bloomberg

28 April 2017

Tata Power

Risks



Higher than expected coal prices:

As mentioned earlier, coal business is one of

the key contributors to TPWR’s consolidated PAT. Our base Indonesia 5,400kCal

coal price estimate is ~USD60/t. If coal prices were to be higher by USD10/t with

no change in cost of production, the RoE in FY19E would stand increased to

~14% and TP by ~INR20/sh.

Resolution of physical asset verification at Delhi distribution in favor:

the

approved regulated equity in the Delhi distribution business is lower by ~INR30b

to the invested equity, due to pending physical verification of assets. Post the

physical verification, if the matter was to be in favor of TPWR and its actual

investment is approved the adjusted PAT would be higher by ~13-15%.

Conclusion of sale of Arutmin and non-core investments:

The conclusion of sale

of Arutmin (USD400m) and non-core investments (quoted ~INR11b and non-

quoted which includes 1.65% stake in Tata Sons) can unlock value and drive

faster deleveraging.

28 April 2017

Tata Power

Bulls and Bears

Bull Case

Under the bull case we estimate:



Indocoal 5,400kCal coal prices to average USD65/t (in-line with spot prices) in

FY18E (rising by ~2% p.a.) as against our base case estimate of USD60/t.



Valuing the proceeds from potential realization/sale of Arutmin/Quoted

Investments and stake in Tata Sons



Arutmin - USD400m or INR10/sh.



Quoted investments - INR12b or INR5/sh.



Higher coal prices would result in a ~12% increase to the adj. PAT estimate to

INR21b in FY19E (base ~INR19b).



The target price in bull case is INR91/sh.

Bear Case



Indocoal 5,400kCal coal prices to average USD50/t (the lowest annual average)

in FY18E (rising by ~2% p.a.) as against our base case estimate of USD60/t.



Value of investments in not realized in the outlook period.



Lower coal prices would result in a 16% downside to adj. PAT estimate to

INR16b in FY19E.



The target price in bear case is INR57/sh.

Exhibit 51: Bull and Bear case

FY18E

5.6

2.5

1.4

Bear

FY19E

5.8

2.4

1.3

FY20E

6.2

2.2

1.2

FY18E

6.7

63.1

2.5

1.4

Base

FY19E

7.0

68.6

2.3

1.3

FY20E

7.4

74.4

2.1

1.2

FY18E

7.5

2.5

1.4

Bull

FY19E

7.8

2.3

1.2

FY20E

8.2

2.1

1.1

Adj. PAT

EPS

Book value

Debt / Equity

P/BV

P/E

Arutmin consideration

Quoted investments

Target price

INR b

INR/sh.

Source: MOSL, Company

28 April 2017

Tata Power

Financials and Valuations

Income Statement

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT before EO

Regulatory inc./(exp)

EO expense

PBT after EO

Tax

Rate (%)

Reported PAT

Minority and Associates

Adjusted PAT

Change (%)

(INR Million)

2020E

377,827

5.3

305,665

72,161

19.1

23,723

48,438

39,928

4,395

12,905

7,227

56.0

5,678

14,370

20,048

5.9

(INR Million)

2020E

72,161

117

-7,227

65,052

-32,851

32,200

14,479

-18,372

-872

-39,928

-5,339

-46,139

540

22,895

23,435

2015

337,276

-5.4

274,264

63,012

18.7

21,742

41,270

36,993

4,167

8,445

6,393

14,837

10,749

72.4

4,088

-2,410

1,678

-150.9

2016

374,802

11.1

286,876

87,926

23.5

23,764

64,162

34,765

2,970

32,367

-10,194

2,805

19,367

8,693

44.9

10,674

-1,940

11,539

587.5

2017E

315,112

-15.9

257,654

57,458

18.2

18,597

38,861

36,467

4,895

7,289

5,315

72.9

1,975

13,619

15,594

35.1

2018E

341,566

8.4

274,445

67,121

19.7

21,299

45,821

39,887

4,395

10,329

6,036

58.4

4,293

13,930

18,224

16.9

2019E

358,733

5.0

289,198

69,535

19.4

22,536

46,998

39,933

4,395

11,460

6,625

57.8

4,835

14,091

18,925

3.9

Cash flow statement

Y/E March

EBITDA

FX gain/loss

Others

Direct taxes (net)

CF from Op. Activity

Capex

FCF

Int & div income

Investments(subs/JVs)

Others

CF from Inv. Activity

Share capital

Borrowings

Finance cost

Dividend

Others

CF from Fin. Activity

(Inc)/Dec in Cash

Opening balance

Closing balance (as per B/S)

2015

63,012

-5,611

10,493

-8,085

59,809

-34,936

24,873

2,078

-5,891

-38,749

20,692

-1,026

-33,842

-5,121

-3,089

-22,386

-1,326

13,845

12,519

2016

87,926

20,488

-6,583

-4,295

97,536

-39,864

57,672

2,141

-7,044

-44,767

149

-13,037

-33,515

-5,908

-3,369

-55,680

-2,911

12,616

9,706

2017E

57,458

-8,221

8,637

-5,315

52,560

-35,000

17,560

12,167

-92,490

20,977

-94,345

96,440

-36,467

-5,177

54,796

13,011

12,108

25,119

2018E

67,121

-4

-6,036

61,081

-35,358

25,723

14,199

-21,159

3,506

-39,887

-5,339

-41,721

-1,798

25,178

23,379

2019E

69,535

178

-6,625

63,087

-33,190

29,897

14,339

-18,850

552

-39,933

-5,339

-44,721

-485

23,379

22,895

28 April 2017

Tata Power

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/EBITDA

Dividend Yield (%)

FCF(pre-int) to EV yield(%)

Return Ratios (%)

RoE

RoCE (post-tax)

RoIC (post-tax)

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Leverage Ratio (x)

Net Debt/EBITDA

Debt/Equity

2015

0.6

8.7

46.4

1.3

209.5

124.3

8.9

1.7

10.1

1.7

3.3

1.4

6.1

2.7

0.9

0.6

6.4

2.7

2016

4.3

13.1

48.5

1.3

30.5

15.2

5.0

1.3

6.8

2.0

8.8

9.0

9.9

8.0

0.9

0.6

4.5

2.5

2017E

5.8

12.6

58.0

1.3

22.5

14.6

6.6

1.4

12.5

1.5

-5.8

10.8

5.9

2.3

0.8

0.4

8.2

2.7

2018E

6.7

14.6

63.1

1.3

19.3

12.5

5.7

1.3

10.8

1.5

5.5

11.1

6.1

3.9

0.8

0.5

7.1

2.5

2019E

7.0

15.3

68.6

1.3

18.6

12.0

5.5

1.2

10.4

1.5

6.1

10.6

6.1

4.0

0.8

0.5

6.9

2.3

2020E

7.4

16.2

74.4

1.3

17.5

11.3

5.2

1.1

10.1

1.5

6.4

10.4

6.0

4.2

0.8

0.5

6.6

2.1

(INR Million)

2020E

2,705

198,634

201,339

22,311

507,942

30,907

762,499

665,783

218,066

447,717

21,750

16,982

178,998

237,281

13,170

39,849

31,750

152,513

140,230

51,757

88,473

97,052

762,499

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liability

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Goodwill

Investments

Curr. Assets

Inventories

Account Receivables

Cash and Bank Balance

Others

Curr. Liability & Prov.

Account Payables

Provisions & Others

Net Curr. Assets

Appl. of Funds

2015

2,705

122,716

125,421

24,926

423,419

14,014

587,779

583,351

202,217

381,133

36,505

66,258

27,326

243,207

18,442

55,640

21,064

148,062

166,650

52,354

114,296

76,557

587,779

2016

2,705

128,434

131,139

25,814

416,209

14,875

588,037

617,804

202,550

415,254

45,441

46,767

28,855

240,748

18,061

52,042

16,740

153,905

189,029

61,277

127,752

51,720

588,037

2017E

2,705

154,096

156,800

18,205

504,757

30,907

710,669

564,384

150,507

413,877

21,750

16,982

158,974

230,605

11,801

32,799

33,493

152,513

131,520

43,048

88,473

99,085

710,669

2018E

2,705

168,100

170,805

19,652

508,263

30,907

729,626

599,741

171,807

427,935

21,750

16,982

165,668

232,553

12,476

35,870

31,694

152,513

135,262

46,790

88,473

97,291

729,626

2019E

2,705

182,806

185,511

20,991

508,814

30,907

746,223

632,931

194,343

438,589

21,750

16,982

172,273

234,243

12,794

37,726

31,210

152,513

137,614

49,141

88,473

96,629

746,223

28 April 2017

REPORT GALLERY

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